The board of directors is often presumed by strategy
researchers to be key to firm governance and strategy creation
(Pearce & Zahra, 1991). On the other hand, many have depicted
boards of larger, public firms as ineffectual puppets of internal
management (Huse, 1994). While research has implied that outside
investors in new, closely-held ventures contribute to the success
of new ventures primarily through their roles on the board of
directors (e.g., Gorman & Sahlman, 1989; MacMillan, Kulow
& Khoylian, 1989; Rosenstein, 1988), little is really known
about how such boards function. In fact, little empirical work
has been done on the processes and interactions in boards of
directors in general (Huse, 1994). Most studies have tended to
predict board decisions or managerial contracts from board
composition without considering the intervening actions or
behaviors of the boards. The central question driving our study
is the simple question, What do boards of closely-held, newer
firms do? Until we more fully understand where boards actually
focus their attention, how they handle and resolve conflicts
within and across constituencies, and how they actually make
decisions we will but poorly understand the dynamics of board
effectiveness and ineffectiveness.

In order to understand how and why closely-held boards
function as they do we must first understand why they are
structured as they are and how this structure itself is likely to
influence interactions. Agency theory has been the dominant
theoretical perspective used to explain board structures and to
predict the behavioral outcomes of variations in board structure
(Eisenhardt, 1989; Walsh & Seward, 1990). According to this
theory, a central purpose of the board is to protect the
interests of outsiders from misrepresentation or opportunistic
behavior (agency risks) on the part of venture management (Jensen
& Meckling, 1976). Agency risks exist because managers'
(agents) interests do not perfectly match those of outside owners
(principals) and because outside owners will not have sufficient
information on all of management's abilities and actions. In
short, the theory suggests that the board may utilize
outcome-based devices such as equity position or stock options to
align entrepreneurial management's interests with those of
outside ownership, and behavior-based devices such as the board
structure itself to provide information on managerial actions to
limit agency costs. Clearly, some support has been garnered in
the context of new or small ventures for these propositions
(e.g., Barney, Busenitz, Fiet, & Moesel, 1989; Sapienza &
Gupta, 1994). However, the evidence is scant and somewhat
contradictory at this point (Huse, 1994; Sapienza &
Korsgaard, 1996).

We posit that agency risks do predict board member behavior
(i.e., including the behaviors of both entrepreneurial managers
and outside board members), but imperfectly. For example, the
theory provides little insight into how principals or agents
determine risks and what defines acceptable risk. Specifically,
it does not address how board processes such as information
exchange influences the willingness of exchange partners to
accept varying levels of agency risk. Moreover, agency theory
focuses on a limited set of actions: those intended to minimize
risk, such as monitoring and board structuring. Consequently, it
has limited ability to explain how great a role a given board of
directors will have in strategic decision making, how quickly it
will make decisions, what the quality of decisions are likely to
be, or even how it would enforce existing governance provisions.

We propose that insights from procedural justice theory may be
used in conjunction with agency theory to predict how agency
conditions and board member conduct affect ongoing board
interactions. Procedural justice offers insights into the
dynamics of process and decision control. While sharing with
agency theory the assumption of self-interest, procedural justice
accounts for additional motivations in joint decision making and
speaks directly to the issue of how trust (the obverse of the
fear of opportunism) may be built or undermined. Similar to
agency theory, procedural justice is vitally concerned with the
impact of self-interest on preferences for and responses to
outcomes, but it also looks at how both the establishment of
rules governing decisions and the interactions in the
decision-making process itself affect the level of trust and
reciprocity in the relationship. In summary, agency theory
provides insight on ex ante contracting, and justice theory
illuminates the dynamics of ongoing decision making. Together,
the two hold significant promise for predicting and explaining
what new venture boards do.

This investigation builds a model of board processes in new,
closely-held ventures through the integration of agency theory
and procedural justice theory. Because these processes are but
poorly understood at this point, we went into the field and
interviewed 14 current board members (entrepreneurial CEOs,
private and venture capital investors, and other outside board
members) on their experiences both inside and outside formal
board meetings. We describe in the next section specifics
regarding the collection and use of these interview data. In the
central section of this paper, we use current theory and research
to build propositions regarding what boards do. We focus in these
sections on propositions regarding 1) the focus of board decision
making, 2) the strength of conflicts over personnel,
compensation, and valuation, and 3) the decision-making mode
used. Where appropriate, we illustrate perspectives with quotes
from the interviews. In the final section of this paper we
discuss the implications of our model for practice and for future
study.